With the consultation on the proposed Value for Money (VfM) framework closing today, the pensions industry has raised concerns over the new Red-Amber-Green (RAG) rating system.
The Financial Conduct Authority (FCA) launched its consultation for contract-based schemes ahead of the Department for Work & Pensions (DWP) introducing equivalent legislation for trust-based schemes in an upcoming Pension Schemes Bill.
Under the proposals, pension schemes will be required to publish and be compared on metrics that demonstrate value, including on investment performance, costs and charges, and service quality under a red, amber, and green rating system.
The RAG system promises simplicity, however, the Pensions and Lifetime Savings Association (PLSA) pointed out that the number of data points that will require additional contextualisation under the new system could lead to a “wide range of scheme performance masked within a green rating as well as creating a significant regulatory burden”.
The PLSA highlighted that schemes captured within the framework serve very varied demographics, and the “score” of some metrics proposed will reflect that membership profile more than they reflect the value of the service offered.
It added that anything but close supervision to ensure proper compliance with the framework could result in schemes with very varied performance being graded as green. “As a consequence, the current approach is unlikely to drive meaningful consolidation in the market,” it said.
In response to the consultation. the Society of Pensions Professionals has recommended that the proposed amber rating be changed so that instead of being a broadly negative assessment, it is instead considered “VFM with room for improvement”.
The response explains, that “despite there being three indicators, in practice the outcome is binary, VFM or not VFM and the current proposals therefore place overtly negative connotations on an amber rating”.
It added: “This could be solved by making an amber rating “VFM with room for improvement”. And for that improvement to be deliverable, and required to be delivered, within a definitive timeframe of say two years.”
“We are concerned about the volume of data that the proposed framework will require providers to collect and communicate, which in some cases appears disproportionate“
Sophia Singleton, SPP president
SPP also added that the ability for decisive action for red-rated schemes is “critical for the success of the framework”, and until firms have the ability to do bulk transfers without savers’ individual consent for contract-based schemes, the framework is “really lacking a key component to make it successful”.
Sophia Singleton, SPP president, said: “The SPP supports many of the proposals being put forward within this consultation and the overarching objective of improving value for money, but at the same time we are concerned about the volume of data that the proposed framework will require providers to collect and communicate, which in some cases appears disproportionate.
“We also believe that a change to the proposed amber rating is necessary to increase the effectiveness of the framework and increase the chances of delivering value for money for more savers.”
The Pensions Management Institute (PMI) has also raised concerns over the new RAG system.
Tim Box, chair of PMI’s policy and public affairs committee said: “The proposed RAG assessment is too blunt and severe. In reality, under these proposals, anything short of a green rating is a failure. We would prefer a rating system that recognises situations where only minor improvement is needed and also gives recognition of where VFM expectations have been exceeded.”
Extensive disclosures
In addition, PMI is also concerned over the extensive set of disclosures proposed by the FCA requiring “too much detail in some places for little benefit” which it believes could “compromise providers’ ability to clearly demonstrate VFM in the areas that have the most impact on savers”.
Box said: “If the VFM framework is to succeed, it is vital that providers are not hamstrung with requirements that are overly complicated and onerous.”
As an example of this, the PMI questions why asset allocation disclosure – and particularly a split of UK and non-UK assets – is required when the FCA states that this will not form a direct part of the VFM assessment process.
The PLSA, meanwhile, is concerned that returns data disclosures proposed will discourage allocation to higher risk-returning assets, which are seen as key to shifting emphasis from cost to value.
It highlighted that typical holding periods for private equity and other “productive” assets are seven to 10 years, but the FCA proposes primary returns data for comparison over one, three and five years.
It said: “Basing value assessments on such data – while not accounting for forward-looking projections – will likely, therefore, disincentivise investment in private markets, as it may present schemes as poor value over shorter timeframes.”
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